April 11, 2011

2011 SMA Fixed Income Manager of the Year: Sage Advisory Services

Fixed Income SMA Manager of the Year Award
Sage Advisory Services
Intermediate Fixed Income Portfolio

Throughout the month of April, AdvisorOne will focus on separately managed accounts: the money manager options advisors have, the platforms through which they can gain access to those managers, how they can conduct due diligence on those managers, and how advisors are using SMAs in client portfolios.

We begin our coverage by presenting the Investment Advisor-Prima Capital seventh annual Separately Managed Account Managers of the Year. In a feature article in the April 2011 issue of Investment Advisor, seven managers in six different asset classes were chosen as "A Class Apart."

(See thecomplete calendar of our Special Reportfor past and upcoming coverage.)

In this article, we focus on Austin, Texas-based Sage Advisory Services, winners of the taxable fixed income award for its intermediate bond portfolio

The philosophy: A value-oriented comprehensive portfolio management approach designed todeliver higher quarterly total returns over an intermediate investment horizon, providing  current income with moderate volatility.

The portfolio: Investing in investment grade fixed income obligations, using U.S. Treasuries, investment grade corporates and municipals, mortgage and asset backed securities with a maturity range up to10 years.

The performance: 2010 (company supplied):

Taxable intermediate fixed income: 6.13%

Barclays U.S. Aggregate Bond Index: 6.54%

Assets in portfolio: $3.5 billion

Total assets under management: $9.51 billion (as of 3/31/11; see company Form ADV)

The people: Investment Advisor Editor John Sullivan spoke in March with Robert G. Smith, AIF and CIMC, president, CIO and firm principal, and Mark MacQueen, executive VP and a member of the Fixed Income Analysts Society. Sage was also named the top RIA wealth management firm in Austin by the Austin Business Journals.

Fixed Income SMA Manager of the Year Award
Sage Advisory Services
Intermediate Fixed Income Portfolio

When Bob Smith (at right in photograph) decides on a course of action, he doesn’t mess around. After meeting Mark MacQueen (left in photography) at the wedding of a mutual friend, the two opened the door of Sage Advisory Services three weeks later.

Smith and MacQueen, both Merrill Lynch alums, decided on a fixed income focus, not a popular message in the tech bubble build-up of 1996.

“It was all equities at that time, so we knew we needed a specific strategy to get people interested,” Smith recalls. “I also knew that in order to keep them engaged, we’d have to have complete transparency about what it was we were doing. It’s their money; they should have access to it whenever they want and I had no problem with them looking over my shoulder about the moves I was making. That holds true today.”

It’s that strategy that brought the firm from nothing to their current nearly $10 billion asset level, Smith says.

According to Prima Capital, Investment Advisor and AdvisorOne's partner in the annual SMA Managers of the Year, the intermediate fixed income portfolio ended 2010 with $3.7 billion in total assets. The investment team is reasonably staffed with 14 investment professionals. Like many taxable fixed income

 

processes, Sage begins with its six member investment committee setting specific duration, yield curve and sector positioning for each portfolio. For the intermediate portfolio, maturities range from one to 10 years, and include all of the sectors of the taxable market, though the MBS sector is consistently underweighted relative to the Barclays Intermediate Aggregate. Sage leverages several street research sources in addition to its own internal research.

The approach in security selection is different from most managers in that Sage isn’t looking for the “hidden gems” in the corporate credit space (typically 30% to 40% of the portfolio), but rather focuses on liquidity and relative value comparisons, looking to capture the broad beta of the preferred industry segment. Given this approach, the average corporate holding is just 1% to 1.5% and the typical account will hold more than 25 corporate issues. Treasuries, agencies and, to a lesser extent, the MBS holdings in the account are used to modify duration and provide liquidity.

As Prima notes, the performance of the intermediate strategy has been exceptionally consistent over the past 14 years. The composite has outperformed the Barclays Intermediate Government Credit Index in 12 of the 14 years, underperforming by a total of just over 1% in 2002 and 2003 combined. The outperformance has always been relatively small (only in 2009 was the outperformance more than 1% in a calendar year). On a risk-adjusted basis, the rolling two-year alpha on the product has been positive 96% of the time.

But Smith notes another area where the firm is finding alpha: the efficiency with which the firm executes its trades, keeping transaction costs low that it can then pass along to clients.

“It’s an area where we find considerable alpha,” Smith says. “We make the street compete against itself for the benefit of our clients.”

(See thecomplete calendar of our Special Reportfor past and upcoming coverage.)

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